Luis Oganes (JPMorgan) chaired the discussion at EMTA’s latest Forum in Boston, and focused on four themes: the global economic environment, the resilience of EM local debt despite market volatility, continued strong inflows into EM debt, and the hunt for alpha in 2018. 50 EM market participants attended the Forum, which was sponsored by MarketAxess and held on Thursday, April 5. 2018. Balanz Capital and JPMorgan provided additional support for the event.

In opening the session, Oganes noted that2017 was a “stellar year” for EM, as emerging country growth outpaced that of their DM counterparts. The expected contraction in DM Central Bank liquidity, however, added uncertainty to the 2018 outlook.

Heather Hagerty (Fidelity) argued that, “if you can call the dollar, you can call pretty much call every asset class.” Thus, in her view, portfolio managers should focus on the primary drivers of the dollar’s relative strength/weakness. Hagerty argued that EM would remain in a sweet spot, with the actions taken thus far by the US FOMC and the ECB in line with market expectations, while “strong synchronized global growth continues.”

Victoria Courmes (GMO) concurred, noting that inflation generally appears to be under control, and also underscoring the importance of predictable DM Central Bank moves. For her, a major wild card was the potential for trade wars, notably between the US and China. Adopting a more skeptical view on EM levels was Mike Cirami (Eaton Vance), who acknowledged he was less constructive on EM fundamentals. Finally, Balanz Capital’s Walter Stoeppelwerth remained perplexed at the weak dollar, and advised that there could be entry points into the asset class if growth scares appear.

Oganes reminded attendees of strong EM inflows. Cirami observed that, in an industry which focuses heavily on historical returns, EM performance would continue to attract new investors, especially as the asset class has largely shrugged off potential shocks, such as elections, the Venezuelan and Mozambican defaults and US equity market volatility. “Absent a new development that changes the dynamics, flows into EM will continue,” he stated. Hagerty concurred, and specified that, while interest in EM sub-sectors might fluctuate (e.g. between hard currency- and local currency-debt, or a focus on commodity exporters vs. commodity importers, etc.), interest in EM generally remained strong.

Speakers offered their thoughts on potential alpha generation this year. “We are not known to be perpetually bullish on Argentina, but I believe we are now at an inflection point, especially after the mid-term elections,” stated Stoeppelwerth. He highlighted the Macri administration’s move to reduce the primary deficit, to increase private-public partnerships to improve infrastructure, and to weaken the peso, to perhaps 23 per USD. Cirami, noted that, within his CEMEA mandate, Serbia might offer the most potential, “as it could be among the reformers of the past decade, and the local markets are really developing.” He also saw opportunistic trades on Turkey’s external debt. “Erdogan….pays his debt.”

Prompted by audience questions, Oganes suggested that that taking a long position on Venezuelan debt was in essence, “a bet on regime change, because recovery values will not be realizable with President Maduro still in power.” He added that, “my guess is that if we woke up to any change, there would be a huge rally.” Oganes recommended a neutral stance on Venezuela, reasoning that despite Venezuela’s relatively small weighting in industry indices, “it will hurt if you miss out [on any rally].”